Golden Girl Finance
 
York Region Money Coaches
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Personal Finance

The best way to fund emergencies

August 23rd, 2016 by

Spoiler alert: It's exactly what you think

 
 

Here’s a blast from the past that I love more than ever – the emergency fund.

It is meant for the inevitable financial surprises that can happen at any time. You know what they are – a dripping faucet, roof or hot water tank. A tooth. Being asked to be in a wedding party. They all qualify if the dollar figure is more than your chequing account can handle without risking an overdraft charge.

Credit cards and lines of credit are where most people pack their emergency expenses, and banks love this. [Brief note: try to avoid doing things that banks love. This is where their profits come from]. Using debt vehicles to fund inevitable emergencies isn’t a good idea because of the direction these things go over time, and there’s only one strategy that can help you avoid this path – it’s having an emergency fund.

How much should you save?

The emergency fund doesn’t have to be $20,000. I am fine if it is just $1,000 or $2,000 for those who have jobs that are relatively secure and are renting. Maybe it’s $5,000 for those with a house and two cars. What is important is that it will cover your next emergency and it is sitting in a Tax-Free Savings Account – in cash. Don’t invest it in stocks or mutual funds. Make sure that when you need it, it is available as cash, perhaps through a transfer to your bank account within a day or two.

Those who have an emergency fund just sleep better. They are ready for the inevitable. They can focus on debt elimination or retirement savings without worrying that an unexpected bill could jump up and take a bite out of their plan.

When it is dipped into, it is topped up again as soon as possible. And because you’ll appreciate how this works in helping you avoid debt, you’ll be keen to get this protection back in place fast.

So take a trip back in time – and put in place an emergency fund with cash saved. It’s the buffer you’ll really appreciate when the time comes.

You don’t need to be one of the millions of Canadians struggling with day-to-day money questions and challenges. Whether your challenge is rising debt, wondering when you can retire, wanting to lower the fees that are reducing your investment returns, or just needing a second opinion, York Region Money Coaches is here to help.

 

Estate Planning

Minimizing an estate's income taxes

June 28th, 2016 by

In honour of Tax Freedom Day - a look at how to preserve your financial legacy

 
 

June 9th was Tax Freedom Day in Canada. Let’s face it, as Canadians we hate paying income taxes and we pay more than all but a small handful of countries in the world. A massive industry is built around minimizing taxes for Canadians – they are wonderful folk we call accountants. And while it is always recommended that you seek the counsel of a qualified CPA to assist with your estate’s tax minimization strategies, there are some basics that you should understand before you engage them.

The final tax return for the deceased is what needs to be completed for the year they pass away. Without any tax strategies, there may be a lot of taxes owing, and the estate will need to swallow all of them.

5 strategies for minimizing your estate tax

Some simple planning can help minimize these taxes - here are 5 strategies to consider:

  1. Take advantage of spousal rollovers. With a common-law partner or spouse, no capital gains tax will be owing (as it normally would be) if you elect to have all capital property move into your partner’s name upon death, including but not limited to houses, cottages, investments, RRSPs and RRIFs. If this ‘rollover provision’ is not taken advantage of, half of the capital growth would be taxed at the deceased’s marginal tax rate in the year of death. Take advantage of this tax deferral. Taxes will only be owing now when the second spouse sells the property or dies.
     
  2. Give assets away while you’re still alive. One way to reduce the amount of taxes owing at death is to spread out the tax bill by selling or gifting property in years prior to death. Remember, the way our marginal tax brackets work, it is better to spread income out over several years rather than pay the maximum 53.5 percent marginal tax rate for income exceeding $220,000 in Ontario in the year of death. Because capital gains tax (for physical and financial property) can be significant, it may be beneficial to gift some assets that have appreciated significantly before you die – again, to spread out the tax bill in years when taxable income is lower.
     
  3. Take advantage of exemptions available to you. If you own more than one residence (say a home and a cottage), you should spend a few minutes determining which one you should deem as your primary residence for tax purposes. The primary residence will have no tax owing on it (regardless of when you sell it, or who it might gift it to) for the years you deem it your primary residence. Because you can only name one property per year as your primary residence, it’s a good idea to name the one that has appreciated the most as your primary residence, and pay the lower capital gains tax bill owing on the other one, upon its sale.
     
  4. Give to charity. There are serious tax credits for charitable gifts given upon your death (usually gifted through your will). In fact, if you donate marketable securities – like say, stocks – there will no capital gains inclusion on your tax return. In this case, it actually pays financially to be generous.
     
  5. File multiple tax returns. If you can spread your taxable income across more than one tax return (thereby taking advantage of personal tax credits and basic personal exemptions for than once!), then do it. And it’s possible you could qualify for 2 or 3. There is the Final Return, the Return for rights or things, the Return for income from a testamentary trust and a Return for a partner or sole proprietor. Spreading income out across a few different tax returns will protect some of your money from the highest marginal tax rates – always a good thing.

So, yes taxes at death are inevitable. However, by discussing these strategies with your tax professional you might be in a position to protect your Final Return from some taxes owing, and provide your loved ones with a bit more of a financial legacy.

Estate Planning

Understanding taxes owing at death

June 8th, 2016 by

Especially important news for residents of Ontario

 
 

Many seniors worry about the taxes owing upon death – or what used to be called Probate Tax. If you have a loved one who is starting to think through their estate, and who is wanting to limit the taxes owing, you may want to know about this too.

Those living in Ontario need not worry. What is now called the ‘Estate Administration Tax’ is relatively small compared to other more important legacy planning issues, like income tax in the year of death or creating trusts for loved ones if needed.

The calculation of this tax assessed at death is fairly simple. First, add up the total value of the estate of the deceased. DO NOT include the value of real estate owned outside of Ontario, insurance owed to beneficiaries or jointly held property that will pass to a survivor upon death.

Next, take $5 for each $1,000 (or part thereof) of the first $50,000 of the estate value and add it to $15 for each $1,000 for the estate value above $50,000. This is what will be owing.

Example:

If a deceased Ontario resident passed away with an estate valued at $600,000, the Estate Administration Tax would be calculated as:

$5 for each $1,000 up to $50,000 = $250

plus

$15 for each $1,000 above $50,000 = $8,250

A total of $8,500 would be owing upon the death of the deceased. This represents just a 1.4% tax rate.

Calculate tax for any estate size:

http://www.attorneygeneral.jus.gov.on.ca/english/estates/pre_calculated_estate_administration_tax_table.pdf

The big tax bill will never be this ‘Death Tax’ but rather the ‘Income Tax’ on the final return of the deceased. This is where all assets not jointly-held are deemed sold, and the appropriate taxable capital gains are included in taxable income along with full value of RRSPs/RRIFs (if there is no spouse or common-law partner) and any other taxable income in that year.

The combined Federal/Provincial tax rate is 53.5% for income exceeding $220,000 (2016) in Ontario, so it makes sense to spend more time reducing income tax than trying to minimize the Estate Administration Tax, which will never exceed 1.5% (regardless of size of estate).

So the next time someone complains about estate taxes owing at death, re-direct their energies towards minimizing income tax on their final tax return. This is where the big savings lie, and I’ll address some of these strategies next time.

Retirement

6 ways to save on taxes with a significant other

May 3rd, 2016 by

Retired? Income splitting options could mean an extra vacation or two for... well, two

 
 

Benjamin Franklin once said “Nothing is more certain than death and taxes”. But when it comes to paying taxes, those with a common-law partner or married partner are simply better off. Paying less total income tax is not only possible, but a virtual guarantee because of the gifts granted by our government to encourage long term relationships.

6 primary ways to save on taxes when you have a significant other

  1. The Spousal RRSP:

    If your retirement assets and income look they will exceed your spouse’s, contribute to their RRSP by opening up a Spousal RRSP. You will still get the tax refund (it will still be considered a deduction against your income for tax purposes), but they will get the income generated by your contributions in retirement. And it’s your RRSP contribution room that will be used up – meaning a stay-at-home spouse can actually build up their RRSP through their partner’s contributions to their Spousal RRSP. A good thing.
     
  2. Using your partner’s lower age to determine RRIF minimum withdrawals:

    One goal in retirement should be to allow the tax-deferral of assets to continue as long as possible. With Registered Retirement Income Funds (what most RRSPs will be converted to eventually), there is a minimum you must withdraw each year as taxable income. That minimum is based on your age, and it increases each year. The government allows you to use your younger spouse’s age to determine this percentage – another big save if you are a few years apart.
     
  3. CPP income splitting:

    A couple is permitted to ‘assign’ their CPP pensions. This is a form of income-splitting that allows each partner to assign half of their CPP to the other. Again, if they are in different marginal tax brackets (because of their respective retirement income) this will save in taxes owing.
     
  4. Property roll-over upon death:

    Upon one’s passing, there is a full accounting of assets owned, and everything is ‘deemed disposed’ at its fair market value. Tax may be owing on the growth in value since the purchase of property and investments held by the deceased. One way to avoid this tax bill is to roll-over all property to a surviving partner. It is a simple election on the final tax return and is one of the most significant tax deferrals available. And yes, it includes the family home, the cottage and investments of all kinds, including RRSPs/RRIFs.
     
  5. RRIF and Pension income splitting:

    Income generated from an RRSP or RRIF after age 65 can be split evenly with a spouse, and so can the income from a defined benefit pension, at any age. However, it is important to note that if you plan on retiring before 65, RRSP/RRIF income cannot be split, nor can benefits from a defined contribution pension. This is why spousal RRSPs are still important for those who plan on retiring before 65.
     
  6. Survivor Pensions:

    For those with a defined benefit pension at work, there is always (by law) a spousal survivor pension, that is available to the surviving spouse that ranges from 60% – 100% of the employee’s pension. Unless you as the receiver decide to forego it when the pension option is made, you will be guaranteed this survivor pension for life. A small CPP survivor pension is also available to the surviving spouse of a CPP recipient.

Taxes matter a lot in retirement – the ability to split income, share income, defer tax and roll-over assets is not only permitted, it is encouraged and can result in tens of thousands of dollars in tax savings. So get to know these strategies and do your best to even out income with your partner throughout retirement. There might be an extra trip a year made possible from the savings.

Personal Finance

Can Money Buy Happiness?

April 26th, 2016 by

5 ways to find your joy

 
 

For years we have been told that money doesn’t lead to happiness. So why is it that so many crave riches?

Recent research suggests that money can deliver enhanced levels of satisfaction – not from having more of it – but by spending it on things that last and yes, even giving it away.  

A little while ago researchers tracked thousands of people in Germany who moved from one home into a nicer one. Five years later, they found that the homeowners remained more satisfied with their new houses, but did not report more satisfaction with their lives. It had not made them any happier.

In contrast, people who spent money on experiences – whether trips or fancy dinners or a night of dancing – reported feeling happy when thinking about their purchases.

The Globe & Mail recently reported that a research study entitled The Happy Money study showed that we often radically undervalue our time, for instance by wasting hours on a miserable layover in Atlanta rather than spending the extra $150 to get a direct flight.

Perhaps most interesting, they found that giving money away is more likely to make you happy than spending it on yourself. When random passersby were given a $5 bill and instructed to either spend it on themselves or to spend it on someone else, those who gave it away reported feeling significantly happier that evening.

Spending on others makes you feel good, generous and wealthy.

In the book ‘Happy Money’, authors Elizabeth Dunn and Michael Norton analyze what spending choices maximize happiness. Here are some of their suggestions on how to buy joy.

1. Buy experiences

Studies have shown that paying for trips or special meals creates more happiness than buying objects. Even spending a few dollars to play a video game or hear a song provides more lasting happiness than buying a few trinkets.

2. Make it a treat

Humans adapt to everything, including things that make us happy. Research shows that we vastly underestimate just how quickly our pleasure will fade. Instead of cutting out ice cream completely, by limiting it to special occasions we can “re-virginize” ourselves, renewing our capacity for pleasure.

3. Buy time

While wealth theoretically allows us to outsource some of our most hated tasks, most people tend to overvalue money and undervalue time. Before you make a purchase, think: “How will this change the way I use my time?”

4. Pay now, consume later

Paying up front and delaying your consumption is one way to increase your happiness on any given purchase. Vacations make us most happy because of the anticipation. Studies have shown that even waiting briefly before eating a Hershey’s Kiss makes it taste better.

5. Invest in others

Research shows that spending money on others can make you happier than spending on yourself. This is true for Warren Buffett, who famously decided to give away 99 per cent of his wealth, but studies also show that it’s true for Ugandan women buying life-saving malaria medication for a friend. Earn your money, but to be happiest, it helps to spread it around.

So, how will you buy joy this year?